Supreme Court Seems Skeptical of F.C.C. Position on NextWave

Published: October 9, 2002

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ASHINGTON, Oct. 8 — The Supreme Court gave a skeptical hearing today to the Federal Communications Commission's contention that it acted within its rights in 1998 when it confiscated more than 200 valuable wireless communications licenses from NextWave Telecom, which had won them at auction but fell behind in its payments and filed for bankruptcy protection.

Under federal bankruptcy law, which is aimed at giving troubled companies a chance to reorganize and return to financial health, the government may not revoke a license "solely because" the holder has sought protection from its creditors. The federal appeals court here ruled last year that the F.C.C. violated this law by seizing the licenses for which NextWave had promised to pay more than $4 billion. Catching the telecommunications roller coaster at a high point, the commission then reauctioned the licenses to Verizon Wireless and other major companies for $16 billion. But the licenses have never been released because of the legal battle. A victory for NextWave would allow the company to use the licenses to finish building its wireless network or sell them to another company.

The intersection of bankruptcy and telecommunications law might not sound calculated to draw crowds to the Supreme Court on an October morning, but the long row of Lincoln Town Cars idling on Maryland Avenue outside the court indicated otherwise. With billions of dollars at stake, some star legal talent on display and implications for other regulated industries, the case drew an overflow crowd to the section of the courtroom reserved for members of the Supreme Court bar. With barely elbow room to move, many of the lawyers scribbled notes during the hourlong argument.

The government's main argument, presented by Paul D. Clement, a deputy solicitor general, was that the bankruptcy law's prohibition against revoking licenses did not apply to the F.C.C.'s action against NextWave because the commission was acting not as a creditor but as a regulator. As a regulator, Mr. Clement said, the F.C.C. properly regarded NextWave's failure to make its payments "as a proxy for determining that continued possession of the licenses was not in the public interest." NextWave's insolvency was therefore not the "sole" reason for the confiscation, he said.

This provoked a long discussion about the meaning of "solely," with some justices expressing skepticism about the government's motivation. "You say it was a public-interest determination, but there is an economic correlation," Justice David H. Souter told Mr. Clement. He noted that the value of NextWave's licenses dropped sharply after the original auction and said: "When the value dropped, you said we want our whole $4 billion, and then when it went up, you said we want to reauction and get the increase in value. That's an economic decision, not regulation."

Justice Antonin Scalia was even less sympathetic. "You're just making up a regulatory purpose," he said. "This is a classic case that the bankruptcy code is directed to."

The only justice who appeared at all receptive to the government's position was Stephen G. Breyer, who suggested that a ruling for NextWave might put the F.C.C. at a disadvantage to other creditors. When NextWave's lawyer, Donald B. Verrilli, argued that the law placed the F.C.C. in the same position as any other lender to a bankrupt borrower, Justice Breyer said: "If you're right, I see no way in which the government as creditor can collect money it is owed." For the spectrum auction in which NextWave participated, the F.C.C. required a 10 percent down payment, with the remainder to be paid over 10 years; NextWave was never able to make payments beyond the initial down payment.

Mr. Verrilli told Justice Breyer the purpose of the disputed section of the bankruptcy code was "to protect the right to reorganize." If federal license owners could not keep their licenses while trying to emerge from bankruptcy, "they'd have to liquidate," he said, adding, "The government can get paid to the same extent as any other creditor, but they can't take the license back."

Professor Laurence H. Tribe of Harvard Law School argued on behalf of NextWave's private creditors, which lent the company hundreds of millions of dollars and have a big stake in its viability. A license is "the lifeline without which this entire edifice collapses and is just a bunch of hardware," he said. "The agency can't simply take all the value for itself." Noting that the F.C.C. relied on free-market principles for its license auctions, he said, "The whole market system depends on the rule of law."

The status of the licenses at issue in Federal Communications Commission v. NextWave Personal Communications Inc., No. 01-653, will be complex no matter how the court rules. With the sharp decline of the telecommunications industry, the licenses that Verizon Wireless, a partnership between Verizon Communications and the Vodafone Group , and other big companies won in the second auction are now worth much less. The F.C.C. has given partial refunds of the down payments and announced last month that it was considering whether to let the winning bidders withdraw their applications.